Daily Market Reports | May 07 2014
By Greg Peel
The Dow fell 129 points or 0.8% while the S&P lost 0.9% to 1867 and the Nasdaq dropped 1.4%.
One had to look closely to find any change in the RBA’s May policy statement, out yesterday, from the April statement, but there were a few differences.
With reference to China growing a little more slowly, in April the RBA noted “Commodity prices have declined from their peaks but in historical terms remain high,” but yesterday noted “Commodity prices in historical terms remain high, though some of those important to Australia have softened further of late”.
In April the RBA observed, “for some emerging market countries conditions are considerably more challenging than they were a year ago”. Yesterday that observation was gone.
In April the RBA suggested unemployment in Australia “will probably rise a little further in the near term”. Yesterday the central bank noted, “More recently, there has been some improvement in indicators for the labour market, but it will probably be some time yet before unemployment declines consistently”.
In April the central bank believed, “Growth in wages has declined noticeably. If domestic costs remain contained, some moderation in the growth of prices for non-traded goods could be expected over time, which should keep inflation consistent with the target, even with lower levels of the exchange rate”.
May has confirmed this belief: “Growth in wages has declined noticeably and this has been reflected more clearly in the latest price data, which show a moderation in growth in prices for non-traded goods and services. As a result, inflation is consistent with the target. If domestic costs remain contained, that should continue to be the case over the next one to two years, even with lower levels of the exchange rate”.
And there you have it. Otherwise, the RBA continues to suggest the lower Aussie will help the economy, although its recent rebound will slow the process down, and given inflation remains contained, the most “prudent” course is a period of stable interest rates.
Given recent fears of a rate hike being likely sooner than many had assumed, this is a “dovish” statement. Aside from either a fat finger or idiot blip at 2.30pm, the Aussie traded lower in the afternoon. But just as the forex day-shift handed over to the night-shift around 6pm, the Aussie started to rise. Over 24 hours it is up 0.8% to US$0.9351.
To appreciate why we need to look elsewhere. Last night the UK service sector PMI showed a rise to 58.7, up from 57.6 in March. The pound jumped on the news, to its highest level since 2009, as traders looked to the Bank of England meeting tomorrow night. While not expecting an immediate rate hike, traders feel the BoE will be forced to tighten sooner rather than later given the strength of the UK economy.
Similarly, the eurozone composite (manufacturing plus services) PMI rose to a three-year high of 54.0, up from 53.1 in March. Traders bought the euro on the news, knowing full well the ECB is concerned about deflation and a too-high currency. Mario Draghi has been shadow boxing with markets for months now, but no rate cut or QE-type loosening has transpired. By buying the euro, the market is taunting Draghi to act at the ECB meeting tomorrow night.
Put these together and last night the US dollar index fell 0.5% to 79.13. The Aussie is not in the dollar index basket, but is indirectly impacted through cross-rates.
The greenback fell despite the only US economic data release on the day being the March trade balance, which saw a slight contraction in deficit. That should have been dollar-positive. Gold might have risen on the dollar’s fall, but instead fell US$2.10 to US$1308.10/oz. Gold has rallied strongly on the geopolitical situation this past week (which has only deteriorated), and is now waiting to see what happens next. The US ten-year yield fell, but by a tick to 2.60%.
So why, then, did the US stock market tank? Any drops recently have quickly brought in the buyers, and they don’t call it “Turnaround Tuesday” for nothing. It seems it came down to no one having any real idea of what else to do.
Last night the shares owned by seed investors in Twitter came out of post-IPO escrow. Those waiting this long to cash in their investment decided not to risk any further falls in the share price (the stock has halved from its peak) and dumped big time. Twitter shares fell 18%, sparking another rush out of social media. Meanwhile, some guru speaking at a conference bad mouthed a particular biotech, and biotech shares started getting slammed again.
The chain reaction sent the volatile Nasdaq plunging 1.4%, dragging down the broader market and eventually the blue chips as well. It was, quite simply, a “sell day”. Tomorrow could just as easily be a “buy day”.
Base metals came back on line last night with a familiar 0.5% fall in copper and 1.5% rise in nickel. Spot iron ore regained the US10c it lost the day before and is back at US$106.00/t.
As each day goes by without new sanctions against Russia, oil traders feel nervous about geopolitical premiums in the face of abundant supply. Last night Brent fell US61c to US$107.02/bbl but West Texas rose US35c to US$99.85/bbl.
The SPI Overnight fell 25 points or 0.5%.
Today in Australia sees retail sales and the construction PMI. HSBC will release its China services PMI.
Rudi will appear on Sky Business at 5.30pm.
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